lecture 5 regional economic integration

© Ram Mudambi, Temple University, 2007

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Lecture 5Regional Economic Integration


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Regional Economic Integration

Agreements among countries in a geographic region to reduce, and ultimately remove Tariff and Non-tariff barriers (NTBs)

to the free flow of goods, services and factors of production among each other.


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Levels of Economic Integration

Customs Union

Common Market

Political Union

Level of Integration

Free Trade Area

NAFTA Economic Union

EU 1992


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Dimensions of economic integration

Free tradebetweenmember

states

Commonexternal

tariff

Free movement of

factors ofproduction

Harmoni-zation

of economicpolicy

Free tradearea

Customs union

Commonmarket

EconomicUnion

Centralizationof economic

and monetary policy

YES NO NO NO NO

YES YES NO NO NO

YES YES YES YES NO

YES YES YES YES YES

Outputs Inputs Policy


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Economic Case for Regional Integration

Stimulates economic growth in countries Countries specialize in those goods and

services efficiently produced. Gains from trade a la Smith and Ricardo

Additional gains from free trade beyond international agreements such as GATT and WTO.


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Trade Diversion: The Viner Paradox*

* Named for Jacob Viner, Professor of Economics, Harvard U, 1933

England Germany

Cuba

CaneSugar

Beetsugar

Before Customs Union

• 30% tariff on all sugar imports

• German beet sugaris 15% more expensiveto produce than Cubancane sugar

• Efficiency in the pattern oftrade is maintained – Cuban sugar dominates


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Trade Diversion: Viner Paradox

England Germany

Cuba

Beetsugar

CaneSugar

After Customs Union

• The customs unionmakes German sugarartificially cheaper thanCuban sugar

• The pattern of trade isless efficient than before

‘RING-FENCING’


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Political Case for Economic Integration

Internal: Economic interdependence creates incentives for political cooperation and reduces potential for violent confrontation

External: Together, the countries have the economic clout to enhance trade with other countries or trading blocs


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Impediments to Regional Integration

Groups within countries may be hurt Factor movements, particularly labor migration

Potential loss of sovereignty and control over domestic issues Environment, workplace safety

• E.g., Mexican trucks on US roads

Debate – the Viner paradox lives on Is integration trade creation? Is integration trade diversion?


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Impediments to Regional Integration

Impediments increase with the level of integration being proposed Free Trade Area Customs Union Common Market Economic Union


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Free Trade Area Desired impacts –

increased trade flows

Likely impact – increased FDI

Opponents import sensitive industries (goods/services

imports) non-factor-specialized industries (job export)

Supporters?

1 2

TradeFDI


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Customs Union

Desired impact – increased trade flows with union members

Likely impact – increased FDI within union Viner trade diversion effects

Opponents – same as with the FTA, though less vehement, fewer in number

Supporters?


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Common Market Desired impact –

increased productive and allocative efficiency• factor mobility

• avoiding ‘races to the bottom’ in taxes and regulations

Likely impact – Viner trade diversion effects Erection of alternative barriers to limit factor

mobility

Opponents? Supporters?


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Economic Union

Loss of independent policy control Fiscal transfers from one region to another to

offset the effects of divergent shocks Similar monetary and fiscal priorities Similar levels of economic development, so

that fiscal transfers are not excessive

Difficult to divorce from monetary union Difficult to divorce from political union


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EconomicandMonetaryUnionin Europe


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Regional economic integration in Europe

Europe has two trade blocks European Union

Seen as the emerging power with 25 members The EU-15 = Germany, France, Italy, Spain,

Belgium, The Netherlands, Luxembourg, The UK, Ireland, Denmark, Sweden, Finland, Austria, Greece, Portugal

May 2004 entrants – 10 new entrants European Free Trade Association

Norway, Iceland, Switzerland, Liechtenstein


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Enlargement of the European Union

Collapse of communism led to pressures for enlargement By the end of the 1990’s 13 countries had

applied to become EU members May 2004, 10 new members

Addition of 75 million citizens to the EU Creation of a single continental economy with a

GDP close to 11 trillion Euros


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Enlargement of the European Union To qualify for EU membership

applicants must: Economic requirements

• Privatize state assets

• Deregulate markets

• Restructure industries (remove state subsidies)

• Tame inflation

Political requirements• Enshrine complex EU laws into their own systems

• Establish stable democratic governments

• Respect human rights


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The EU - A relative view, 2003

*Merchandise trade only. + Excludes intra-EU trade..

Share of WorldShare of World

Exports* Imports*GDPGDP

(World Share)

The US

The EU 15

Japan

10,933.5(31.2%)

10,500.2(30.0%)

4,300.9(12.3%)

12.7%

19.3%+

8.3%

21.9%

18.7%+

6.4%


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NAFTA


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North American Free Trade Agreement - NAFTA

Became law: January 1,1994 Over 15 year period:

tariffs reduced (99% of goods traded) NTBs reduced investment opportunities increased

Protects intellectual property Applies national environmental standards Establishment of commission to police

violations


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NAFTA

Removal of most barriers on cross border flow of services

Special treatment for many industries E.g., removal of restrictions on FDI except in

certain sectors• Mexican railway and energy• US airline and radio communications• Canadian culture


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Enlarged and productive regional base

Labor-intensive industries move to Mexico

Mexico gets investment and employment

Increased Mexican income to buy US/Canada goods

Demand for goods increases jobs

Consumers get lower prices

Loss of jobs – 110K per year by some estimates

Mexican firms have to compete against efficient US/Canada firms

Mexican firms become more efficient

Environmental degradation

Loss of national sovereignty

CONSNAFTAPROS


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NAFTA Results Recent surveys indicate that NAFTA’s

overall impact has been small but positive From 1993 to 2004, trade between NAFTA

partners grew by 250 percent Canada’s trade with NAFTA partners increased

from 70% to more than 80% of all Canadian foreign trade

Mexico’s trade with NAFTA partners increased from 66% to 80% of all Mexican foreign trade


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NAFTA Results All countries experienced strong

productivity growth More than 2 million jobs a year were created in

the US during the same time period

The most significant impact of NAFTA has been political NAFTA helped create the background for

increased political stability in Mexico


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Andean PACT


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ANCOM: Andean Pact Bolivia, Colombia, Ecuador, Peru,

Venezuela Cartagana Agreement, 1969. One of oldest

still in existence Population: 97 mm (14% of hemisphere) GNP: $122.6 billion Changed from FTA to customs union in

1992


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Mercosur 1985 agreement between Argentina,

Brazil. 4 nations acceded via the 1991 Treaty

of Asunción Argentina, Brazil, Paraguay, Uruguay Bolivia, Chile, Colombia, Ecuador, Peru

are associate members 1995: Agreed to move toward a full

customs union Trade quadrupled between 1990-1998 Has significant trade diversion issues

Revival in 2003 by Brazil’s president to be modeled after EU with common currency and elected parliament Venezuela became a full member 2006


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Other Hemisphere Associations

Central American Common Market CARICOM Free Trade Area of the Americas


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ASEAN


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Association of Southeast Asian Nations

Created in 1967 400 million citizens Economic, political and social cooperation Brunei, Indonesia, Malaysia, the

Philippines, Singapore, Thailand and Vietnam.


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APEC


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Asia-Pacific Economic Cooperation (APEC)

Established in 1989 in response to the growing Asia-Pacific economic interdependence

Begun as an informal dialogue group, APEC has become the primary regional vehicle for open trade and economic cooperation

Its goal is to advance Asia-Pacific economic dynamism and sense of community.

APEC 2000 GDP is US$17,921 billion APEC's 2000 share of global trade is

46.76%


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21 APEC Members

AustraliaBruneiCanadaChilePR ChinaHK ChinaIndonesiaJapan

Korea

Malaysia

Mexico

New Zealand

Papua New Guinea

Peru

The Philippines

Russia

Singapore

Rep Taiwan

Thailand

The US

Vietnam


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NAFTA EUChina

Japan

ASEAN

APEC

Mercosur

TheAndean

Pact

The World of Trade Blocs

Africa


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Implications for Managers Advantages

Protected markets, now open Lower costs doing business in single market

Concerns Differences in culture and competitive practices

make realizing economies of scale difficult More price competition Outside firms shut out of market Government intervention

• E.g., EU intervention in mergers and acquisitions


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Takeaways The growth of regional trade blocs is based

on both economics and politics Economic considerations (wealth creation)

are fueling expansion Economies of scale, specialization

Political considerations are creating barriers Wealth diversion: Upheavals, dislocation Concerns over sovereignty

lecture 5 regional economic integration

Documents

integration trade diversion

economic interdependence

economic integrationinternal

economic clout

jacob viner

increased fdi opponents

factor mobility opponents

regional integrationgroups